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Can your family afford $4000 a year in additional federal taxes?

Taxes are set to increase by more than $4,000 a year for the average family in 2013 — unless Congress acts. This is based on the average family income of about $70k. For poorer working families making about $22k per year, taxes will increase $1200.

This coming tax increase was dubbed by the Washington Post “Taxmageddon,” a combination of “tax” and the end-of-times Biblical term “Armegeddon.” (See, the Bible is useful for all kinds of things!). The tax increases will not be the end of the world, but they will be painful and will hurt the poor as well as the upper middle class, probably causing some serious pain for everybody reading this blog. The rich will find ways to move their money around to mostly avoid the tax increases, just as they do today.

Let’s be clear about the sources of the tax increases.

As you can see, most of the tax increases come from three different areas, the end of the payroll tax holiday (signed by Pres. Obama), the end of the Bush-Obama tax cuts (signed by both presidents) and the annual threat of the end of the AMT patch (a leftover from the 1960s, if you can believe it). But there are also tax hikes coming because of Obamacare and the end of the 2009 stimulus tax cuts to consider.

This is not just about the much-reviled “Bush tax cuts.” I would like to take a minute to address those tax cuts, because the media has successfully brainwashed people into thinking that the Bush tax cuts are all about giving free money to the rich. In fact, the majority of tax cuts from the Bush tax cuts affect the middle class and the working class. The Bush tax cuts created a new tax bracket for the lower-middle class, ended the marriage penalty and upped the exemption for children. In fact, more than 75 percent of the revenue “lost” from the Bush tax cuts involves families making less than $250k per year. So “getting rid of the Bush tax cuts,” even for the rich, will not get rid of the deficit and in fact will raise only about $70 billion per year, which is not much compared to the $1.3 trillion deficit.

Here is a reminder of what the Bush-Obama tax cuts did:

In any case, all of these tax increases come to nearly $500 billion a year. Some of you are saying, “great, this helps get rid of the deficit.” The problem is that most people reading this will indeed pay a lot more in taxes, but the richest people will find ways of avoiding the tax. There is no way that, over the long term, the tax increases will consistently raise that much money because people change their behavior when faced with more taxes. Some people will stop working, others will change jobs to take advantage of the inevitable loopholes or start their own businesses. The reality is that no matter how much you try to tax people, the overall take of taxes has remained amazingly consistent over the years, between 15 and 20 percent of GDP. Yes, revenue intake is lower now than in the boom years, but this is primarily a cause of a recessionary economy — when the economy is suffering, people make less money and pay lower taxes. But the bottom line is this: you cannot raise taxes too high because people will simply change their behavior and the predicted revenue will not come in.

The reality is that our real problem is spending.

As you can see, we are spending more as a percentage of the economy than any time since World War II. This is our real problem.

So, what should be done about “taxmegeddon?” In the short term, Congress should pass all of the tax breaks again for another two years. In the meantime, Congress should adopt the Ron Paul budget and cut $1 trillion from 2013 spending, eliminating entire federal departments and dramatically cutting military spending. I discuss the Ron Paul budget here.

To be clear, this is the only solution that involves real long-term growth without you giving more and more of your money to an out-of-control government.

What will happen? Congress will not act on Taxmegeddon until after the November elections. I am betting that Mitt Romney will win and that the Republicans will have a small majority in the Senate and maintain the existing majority in the House. Congress will either extend most of the tax cuts in December or when the new Congress is inaugurated. Congress will make minimal cuts in the budget, so we will continue to maintain deficits near $1 trillion in the short term. In the long term, things get even worse because of Romney’s big spending military policy and the coming chaos of spending for Social Security and Medicare. I am hoping that as a country we will collectively wake up and make significant cuts in spending. It is our only chance.

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About Geoff B.

Geoff B graduated from Stanford University (class of 1985) and worked in journalism for several years until about 1992, when he took up his second career in telecommunications sales. He has held many callings in the Church, but his favorite calling is father and husband. Geoff is active in martial arts and loves hiking and skiing. Geoff has five children and lives in Colorado.

7 thoughts on “Can your family afford $4000 a year in additional federal taxes?”

I am not convinced that extending the tax cuts without an agreement on corresponding spending cuts is such a great idea. The federal government is currently borrowing about $13,000 per household per year. A $4,000 per household per year tax increase is about the minimum one can imagine in any plan for a balanced budget. If people don’t want to pay that much more in taxes, they should get behind proposals to cut spending more than a trillion dollars per year.

In addition, the Bush tax cuts largely account for the fact that half the (adult) population doesn’t pay any federal income taxes. Much of this is due to the (refundable) child tax credit, which is indistinguishable from a welfare check. AFDC for the middle class, more or less.

I can’t see how any plan where the federal government spends ~20% of GDP (ex Social Security) that doesn’t tax everyone at least 10% meets minimal standards of fairness. The federal government spends $28,000 per household (before Social Security) and people figure they don’t owe at least 10% of their income to pay for that?

And at the very least, if taxes go up it ought to bring a welcome dose of reality to the political debate about this subject, before the real cliff on the horizon does. I can’t begin to express my contempt for the philosophy that we should have a huge federal budget without paying for it.

Let me be sure I have this right. You think that we should simply and immediately close the departments of Energy, HUD, Commerce, Interior, and Education. Correct? So all the things they do simply will no longer be done, at least by the federal government. Management of national parks and monuments? Gone. Regulation of nuclear power? Eliminated. Weather reports? Blown away. Low-income subsidized housing? Closed. Enforcement of laws against discrimination in education? Never again. Do I have that right?

Mark D, you make a very cogent, logical argument, but unfortunately we have seen this play before. Reagan made a deal for tax increases and spending cuts, and we got the tax increases but no spending cuts. Same with Bush 1. I am with Grover Norquist on this issue: no tax increases under any circumstances, ever. (Both Grover and I favor revenue neutral tax reform, but not tax increases under the existing system). I also believe that it is literally impossible to expect the U.S. economy, at its current size, to generate more than $2.5 trillion or so in revenue, no matter what you do. People will simply stop working or work less or make other changes rather than pay more taxes than that. So we currently bring in $2.2 trillion. The most we could get under any circumstances is $2.5 trillion in tax revenue with our current $15 trillion or so economy. Spending of $3.6 trillion assures a massive deficit no matter what we do, so our only logical solution is cutting spending.

“There is no way that, over the long term, the tax increases will consistently raise that much money because people change their behavior when faced with more taxes.”

This is a true principle. There is a law of diminishing returns. There is a specific point at which raising taxes will actually decrease revenue because the tax increases hinder economic growth.

But we are well below that specific point. France is talking about taxing the rich 75% for heaven sake. And we call Obama a socialist.

If my taxes are raised by $4,000, I will pay an extra $4,000. Simple as that. It’s money the government desperately needs to balance it’s budget. I’m not going to cut my salary by $20,000 just to get out of paying an extra few thousand dollars.

Your argument becomes important at a certain point. If my tax rate at a salary of $149,000 is 20%, but it is 25% at 150,000, then that would discourage me from working harder. But tax rates are put on subtle grades that take into account human behavior. Conservatives should remind politicians about human behavior, because it’s an important factor. But it is only one of many factors in trying to maximize revenue without unduly sacrificing growth.

Could be wrong, but there might be some confusion in Nate’s comment between marginal and average tax rates.

And Geoff’s assertion that we happen to be right at the pinnacle of the Laffer Curve at this moment is, unlike some of his other facts, completely unsupported, which is why I suppose it is framed in terms of his belief.

Of course, the federal government doesn’t need our tax dollars to pay any of its debts. As the monopoly issuer of the currency in which the debts are denominated, it only needs to tax us to create a demand for the currency and to remove spending power from the economy so that it can spend in a non-inflationary way. The federal government is nothing like a household, a state government, or Greece, and its debts cannot be viewed in the same way.

Geoff B, the position of no net tax increases, ever, is a perfectly viable one in the hands of someone who believes in cutting federal spending by more than a trillion dollars a year. When taken up by those who do not, it is fiscal and monetary suicide.

The problem with Grover Norquist is by being completely indifferent to the spending side of the equation, he is expediting our all too politically convenient trip into national ruin.

If anyone complains about taxes going up, my first reaction is going to be what did you do personally to keep the federal government from spending so much money? The American public in general deserve to have their taxes go up, as a matter of personal responsibility if nothing else.

$13,000 per household per year in federal borrowing – every individual who doesn’t support the cuts necessary to close that gap has no one to blame but themselves for higher taxes and every other economic malady. The idea that re-electing the usual collection of fiscal psychotics (Senator Hatch comes to mind) is going to do anything to solve the problem is insane.

DCL, I’m not sure I understand what you mean by: “Of course, the federal government doesn’t need our tax dollars to pay any of its debts.” Are you suggesting the government taxes us as part of some kind of federal monetary policy? How then does it pay it’s debts?

Perhaps you could send me a link that explains your theory or further explain yourself.